Subscribe
Share
Share
Embed
Journalist Markham Hislop interviews leading energy experts from around the world about the energy transition and climate change.
Welcome to episode 197 of the Energy Talks podcast. I'm energy and climate journalist, Marcum Hyslop. Now we're recording this on August 31, 2023, And yesterday, Bloomberg NEF released a story in which about, peak oil sorry, peak gasoline demand in China coming just a couple of months from now and peak diesel demand coming in 2025. So, essentially, peak oil demand for China, it will be, you know, like, mid decade. And China is the biggest oil consumer in the world, and that has all sorts of implications for producing oil producing countries like Canada.
Markham:Canada's the big 4th biggest producer in the world. Alberta all by itself is number 8. I checked the the data on exports, and last year, Canada exported a 100 and sorry. $201,000,000,000, mostly to the u x US, and the second biggest export was autos at 64,000,000,000. 1 third.
Markham:So oil and gas is really important to the economy of Canada, and we don't talk enough about peak oil demand. So I'm gonna talk to Christa Halthunen, a multidisciplinary energy and climate change PhD researcher based at the Centre For Environmental Policy at Imperial College London, and co author of What If We Never Run Out of Oil from Certainty of Peak Oil to Peak Demand. So welcome to the interview, Christa.
Krista:Thank you so much for having me. I do need to point out I've actually just started a new job at the University of Oxford, so I'm no longer at Imperial. But I'm still a multidisciplinary sustainability researcher, so that holds.
Markham:Well, congratulations on the new gig.
Krista:Thank you.
Markham:This is this is a fascinating topic, and maybe let's start off with an overview of your paper, and I know it's a couple of years old now. So maybe if you could kinda, you know, give us an overview and update it, if you like.
Krista:Yeah. Absolutely. So this paper came out kind of in the midst of the COVID pandemic crisis, where what we were seeing was that oil companies were actually really struggling. So we remember there are multiple crises. So demand crashed because people weren't going to work anymore.
Krista:At the same time, we had this oil price war, perhaps led by Russia and Saudi Arabia to some extent. So oil price was really low, and we actually saw these negative oil prices in Texas, for example. So this paper was about looking at what if this is actually a glimpse into our future? And is there any potential world in which this could actually be a longer term thing? Obviously, since then, the oil price has bounced back and the oil companies are doing great right now.
Krista:But the point that's that is raised is that until basically now, since we first discovered oil, oil has been the driving force in our economy. We've been using it for everything, and it's been very, very fast growing, very lucrative industry. But now with the energy transition that is coming one way or another, most likely as we head more and more into the climate emergency, it seems that something's going to change. So the paper basically asked, what if our conceptions about oil and the future of oil as this really strong industry that supports everything in our society is no longer true. Like, what would that mean?
Krista:And we review some of the evidence around what different organizations are predicting about the future of oil demand and then discuss what this would mean for society as a whole.
Markham:Let's talk about different modeling, because the I run into this all the time. You can no 2 modelers agree, on, you know, when oil will oil demand oil demand will peak, what the decline curve looks like, what demand will be out to 2050, and in fairness, you know, most of the modelers provide 3 scenarios, kind of a business as usual and then an economic transition, so an accelerated version and then a net zero version, and and and based on a a variety of assumptions. But one of the things that I think is true is that the modeling of the past year is very different than the modeling of 2020 and previous. The the pandemic, to start, was a big shock, and then Russia's invasion of Ukraine was another huge shock. And I think back I often, Chris, I won't go into all the details because I I bore my, I bore my, podcast listeners all the time with discussion of my my graduate work back in the mid eighties on the transition from horse and steam to tractors and combines, basically, you know, to power farming as it was called then, back in the 19 twenties, was kind of the the last big energy transition.
Markham:That's when the internal combustion engine and petroleum displaced, other other forms of energy or some we became the dominant form of energy. And and my point here is that the World War 1 from 1914 to 1918 was a big shock, and it had a it played a a role in the fast adoption of tractors and combines and farm trucks and farm cars, that sort of thing, after 1918, so into the 19 twenties. And then World War 2 and the and the labor shortages was another big shock that accelerated the the adoption of that transition. And that's what this reminds me of. I mean, I know it's pandemic, you know, in 2020, and 2 years later, you have the invasion of of Russia, But it seems like shocks like that play always seem to play a big role in energy transitions.
Krista:Yeah. There's so many in interesting thoughts in what you said about first how the modeling has changed and also the role of of shocks and energy transitions in general. If I take the second point first, I agree. It's much easier to change something when the old system is not thriving at the moment. So I think it's not an accident that often when we had to build back our economies and societies after wars, that's when we've come up with some new solutions, new types of growth.
Krista:The pandemic was obviously had a huge impact on our economy, but I don't think it's still comparable in terms of size size shock onto the wars. But unfortunately, I think what we're gonna be seeing more and more is just this poly crisis world with all kinds of different crises coming. So this was a pandemic. We don't know what's next. We're already seeing kind of natural disasters, conflicts, and things like that.
Krista:So there's definitely something to like, we are moving to a more volatile world. Hopefully, not an all out world war type situation, but there might be this kind of impetus on change that comes from the social side and not just from from pure business as usual economics. And in terms of how the modeling has changed, I mean, our so the data in our paper was actually already a lot of it was from before 2020. And already then, a lot of organizations and even a lot of oil companies were give putting out a forecast with peak oil demand. So saying that sometime in the 20 twenties, 20 thirties, there might be a peak.
Krista:But usually, this was kind of the, net zero scenario or the really ambitious climate change scenario. So even though it was a possibility, it wasn't necessarily what they were predicting was going to happen. But now even so in this year, for example, BP, obviously one of the, most prominent oil companies in the world, has said that in all of their scenarios, they predict oil demand to start declining in the next 10 years, plateauing and then declining. So that is clearly a big change. And perhaps the pandemic was some kind of a wake up call.
Krista:The pandemic combined with the climate policy measures around the world and the rollout of electric vehicles in many countries, for example, just to show that this idea of a peak oil demand is even a possibility, and it's one that many oil companies now take seriously.
Markham:Right. And the the one of the point that was made in the in the Bloomberg NEF piece was that it's the electrification of transportation that's driving this peak oil demand in China, and it's happening much faster than than modelers had previously expected. So now, as of 2023, the electric vehicles make up, 38% of all new car sales, which in in in the world's 2nd largest economy is no small feat. And secondly, they've already displaced they already make up 5% of the national fleet, and this has been the big, you know, the big debate is how quickly will fleets turn over, because the average age of a car now is 15 years, and, you know, they're just there's inertia in the system. It can't happen it can't happen overnight, but it seems to be happening in China much quicker than we thought.
Markham:And then it seems like in in Europe, where you're based, then it's happening fairly rapidly. North America is slow, but then the US just brought in the inflation reduction act, and now things are speeding up significantly. So EV adoption is expected to to rise fairly quickly. So I think it's fair to say that the those 3 big blocks are going to, electrify transportation fairly quickly, and then the argument has been from the, the folks who think that oil demand won't peak very quickly, the slow transition folks, Vaclav, Shmuel, and and those and those kinds of researchers, is that demand will be supported by emerging economies, middle income economies that we're gonna stick with the existing technology. But I don't think we can we can assume that anymore because we see China and it's, like, BYD and the other their their EV manufacturers who have concentrated on affordable models, you know, $10,000 EVs.
Markham:Now we see them moving into, you know, different the emerging economies like Latin America and Africa and and so on. What what would the what's your take on that?
Krista:This is a really difficult question and hard to hard to predict the future, but I think there is something there. So China I think I just read that China has 50% of the entire world's electric vehicle fleet is in China, And they've also electrified mass through their buses, for example, to public transport. Obviously, that can be electrified quicker potentially because it doesn't depend so much on individual consumers' decisions. It depends on policy. I do believe that transitions take a long time.
Krista:So I think it will be a while before we completely stop using oil for any application, before everyone everywhere in the rural countryside of every country gives up their diesel car or their motorbike, for example. But I think there's definitely something to the fact that we can't expect the future to look like the past. The situation that we're in is completely different from where we have been for the past 100 years. And as you're saying, a lot of these kind of middle income countries that we're expecting to pick up a lot of the demand are really heavily influenced by China and Chinese companies. So we can't really underplay the importance of that.
Krista:In terms of what will actually happen, it's honestly really hard to predict. But I what I've what I've always tried to say is that we can't just assume that because something has been the case for a 100 years, that it's going to be the case in the future, especially now that we are in this poly crisis world where things will anyway have to change. I mean, if we don't do anything about climate change, for example, that's probably gonna destroy a lot of the economic value and just the economic purchasing power globally. So that's also that that would not be a nice way for the, oil demand decline to come about. That's also a possibility.
Krista:So what I'm hoping for is this more of an orderly transition, and I think it's definitely possible to do that. And again, we're not talking about oil stopping tomorrow. But we're talking about there will be a time probably soon when oil demand is no longer grow growing, which can which can have huge implications for oil companies, for economies relying on oil because you then you can't expect these growing returns every year anymore. So that's already a really big shift even though even if we don't completely stop using oil in the next decade or whatever would be a very radical prediction.
Markham:I've interviewed a number of modelers, for peak oil demand. Kings Mill Bond, Rocky Mountain Institute would be 1, Bloomberg, NEF, their transportation division does does modeling based on their, electric vehicle, adoption projections, that sort of thing. And there's there's one consistent message that comes through, and that is that every in in the last 3, 4 years, the trends the trends are are, you know, towards fast, towards EV adoption are, you know, set in stone. I mean, we're going to eventually electrify transportation, but the pace at which we do it is getting faster and faster and faster than than modelers expected. You know, Colin McCarricker, at, at Bloomberg told me in an interview.
Markham:He said, look. You know, we're revising our our, projections, our modeling, you know, every 2 2 or 3 times a year, upwards and upwards and upwards. Mhmm. And because we just nobody anticipated that the auto industry would embrace electric the the way they they have, and we just can't keep pace with the amount of, you know, battery factories and in in the EVs and the cap the amount of capital that's flowing into the industry on and on and on. And so while we can't predict the future, what we can say is the trends, I think, are pretty clear.
Markham:The pace at which it happens is accelerating, and that doesn't look good for oil producing economies.
Krista:Yep. Yep. I think there's something to that. I'm sure you heard this comparison before, growth of solar and also wind now, which has completely surpassed every single prediction over the past 15 years. So every single there's these graphs of the IEA's predictions of what solar growth is going to be in every year.
Krista:That's actually exponentially higher than predicted. So it's very possible that the same will happen or is already happening with electric vehicles. So that gives reason to be optimistic or pessimistic if you're an oil producer who's trying to cling to the old ways and not is not ready to transition and prepare for the future.
Markham:What about I wanna talk about different grades of oil. And this is a a big issue for Alberta because the 3,100,000 of their 4,000,000 barrels a day, is ultra heavy sour crude. And it goes down to the, there's about a 10,000,000 barrel a day global market and then 5,500,000 barrels a day, market in the US, which and so Canada makes up more about 60, 65 percent of of that market, competes against countries like Brazil and Venezuela and Ecuador and so on. And will we see demand for different grades of oil drop or or fall at different rates than, say, light sweet crude?
Krista:Yeah. I think that's absolutely the case. And I mean, the different grades will go for different applications, so you almost have to look at the specific application for every type of oil. But I think one bigger trend that I think might be relevant is that we're already seeing international oil companies try to move their oil production portfolios towards types of oil that are cheaper, easier to extract, and lower emission as well. So that's basically away from these heavy oils because they those tend to have a higher cost of production per barrel.
Krista:And that's simply to prepare their portfolios for eventual potential oil, oil price swings, probable probable drops and rises. So even I every single international oil company represented that I've spoken to about this has spoke has said that this is the first move that they're doing. They're trying to diversify away from the really expensive types of oil and they're banking more on the kind of cheaper, easier to extract oils, which again might not fare well for countries whose, reserves are mostly on the heavier side, like Alberta.
Markham:Wow. The way the Alberta producers have responded is is to go to the federal government, the Canadian government, and say, you know this carbon capture and storage technology? We'd really like to adopt that to decarbonize our or the oil sands, and please wouldn't you pay for most of it? You know? And they're asking they've asked for $50,000,000,000 if you can imagine, so that they can decarbonize.
Markham:So that that that's their strategy is to use CCS and then other technologies. CCS would would account for about 2 thirds of the, of their emissions reduction to debt 0 by by 2050, and then the others would be, you know, different different solvent based and other kinds of technology. So that's the way they're going to approach it. But I I wanna run a scenario by you, and I I I often do this with economists because, nope. I haven't it's one that's posed in Alberta all the time, which is that there will always be oil.
Markham:You know? And the oil companies have said very clearly that if, you know, in the net in the IEA's net zero scenario where the by 2050, the oil demand global oil demand is 25,000,000 barrels a day, they say, you know, we're gonna compete. We're gonna be around in 2050, and we're gonna be competitive. And think, okay. But if let's say that you we peak 2030 at a 105,000,000 barrels a day, just hypothetically.
Markham:So what happens when demand falls to a 100 barrels a day 100,000,000 barrels a day, but you've got a 105,000,000 barrels a day of supply chasing that? Or then it falls to 95,000,000 barrels a day, and then it falls to 90 and 85 and on and on and on, and you still got all the supply chasing. And you've got national oil companies that don't wanna cut back because they need the the revenue to support their government. Even the Saudis, for crying out loud, need a lot of they need $80 oil just to run their their government. So it doesn't seem to me that that while while oil may be around, there's a lot of oil producers, and they're they're not gonna give up market share.
Markham:They're not gonna, you know, just exit the industry willingly. And we we saw in 2014 what happened when you oversupply by a 1000000 and a half or 2,000,000 barrels a day. Prices crash. They go negative sometimes. What how do you see that playing out?
Krista:I think there's an absolutely fascinating question. It was actually a big driving force, behind my PhD. So what does it actually look like if we somehow manage to meet goals of the Paris agreement or any climate goals? What does it look like from the perspective of individual oil producers? And I think you're absolutely right.
Krista:So it doesn't actually take a a big reduction of demand to overcrowd the market. And again, we also saw that in 2020 when the oil prices went negative. And yet it seems that even every single oil producer, regardless of what they're saying about their strategy to become integrated energy companies or what have you, they're still kind of banking on still being around, as you're saying about the producers in Alberta. And the term for this kind of strategy in this transition space is last one standing. So you're going to need some oil companies to pick up the demand in 2050 to 21100.
Krista:What have you? But I don't think there's almost anyone who believes that this is gonna be anyone other than kind of national oil companies with access to very low cost barrels of oil, huge reserves who can actually control to some extent the oil market. So that's why if the oil demand starts declining, even if the decline is very slow, I think producers that have that very expensive kind of heavy oil type supply are going to struggle the most at the start. And there's definitely a chance for kind of government subsidies. I mean, those already exist today for oil producers wanting to prop up their local economies.
Krista:But there will probably come a time if the the decline continues or even the plateauing continues where this just doesn't make economic sense. So I think it would make a lot of sense for oil producers to be honest about the scenario. Like what will happen to us if oil demand in fact does decline and take some kind of measures now to prepare for that. And at least consider it a realistic scenario, even if we don't know exactly when the decline will happen. It's still something that's very possible now.
Krista:And obviously not every company can be the last one standing. Even if oil demand drops by 10%, that already means a lot of companies are going to be, if not out of business, definitely in a very different situation to now. Because you have to also consider oil price. Right? So demands would probably a decline in demand would also lower the price.
Krista:I'm sure it will be very volatile. It's not gonna be like a smooth transition. But then some producers are much more able to still function and make a profit in a low oil price environment than others. And it's probably those producers who are likely to do better in a transition.
Markham:Yeah. They they we, oil sands companies argue that their, their business is very different because it's more like a manufacturing operation than it is a traditional oil and gas extraction business model. And you you build like a manufacturing company, you you build all your plant up front. Also, all your capital costs come up front, and then the the cost your sustaining capex is very low. And so and so the cost per barrel, you can sustain very low prices, you know, for for long periods of time because your capital requirements are low, and you've, you know, you've paid off all your all your up front capital costs.
Markham:But I don't think no. You you were saying if if oil companies were honest, I don't think they're being honest. And the oil sands companies, they do investor presentations, and you can download anybody can download those presentations of of the company's websites. And I I look at them on a regular basis because I'm I'm curious what are they telling investors. And what they're telling investors is they're preparing for a world of declining oil.
Markham:That's what they're saying, and and it's very interesting. You know, most modeling, as you know, goes out to 2050, and they always cut it off at 2040 because between 2040 2050 is a big drop, and they don't want investors, you know, looking at that and going, oh my god. 25,000,000 barrels a day and 25th. That's you know, that'd be a little shock shocking if you were to an investor. So they they go out of their way to to reassure investors.
Markham:But that being said, there still isn't the industry has been disrupted enough already that investors are requiring higher returns. There's a risk premium, I think, in this market, and so the like oil companies around the world, at least investor owned, you know, what they're doing is they're giving a lot of capital a lot of their their cash flow, their free cash flow back to investors in the form of higher dividends and and share buybacks because investors are are nervous. And they're saying, fine. We're gonna give you give you our capital. We wanna make we want a higher return because you're now a risky business.
Markham:You have climate risk. You have transition risk. And that doesn't bode well because then, you know, they're they're in Canada, they're the call on capital is for, a, shareholders first, then meet emissions regulations, and there's very little capital left over to, to be invested in low carbon business models. So they've essentially left themselves no pivot as as markets decline, as price becomes volatile and and falls. They haven't left themselves any room.
Markham:They have what would you where would what would you invest in, and you won't have any money to invest? I I'm I'm curious what you, and I call this the incumbent's dilemma. Haven't haven't got a pivot, so what do you do? What would be your take on that?
Krista:So while I don't know that situation specifically so well, I think we're seeing very similar things in Europe. So with big oil companies making really large profits this year, and then rather than investing those into the development of new business, a lot of it has been returned to shareholders, which in some ways is good. Perhaps those shareholders can then invest in in renewables or what whatever on their own time. But in terms of transition, I agree that it's not really preparing the companies for the future. And it would be really interesting to know what their kind of honest long term plan is here.
Krista:Is it just to hope that oil demand doesn't ever decline? Because that's a little bit what it seems like now. So because obviously not right now, the times are quite good for oil companies with the oil price. But and I think it will be really interesting to see what happens when the price does fall again, because there's always regardless of what happens to long term oil demand, the price oil price always has these boom and bust cycles, and what the plan is for for those times. So I I agree with you.
Krista:Of course, we can also talk about, like, what would then be a good thing for companies to do with that money otherwise. So that's a lot of talk about diversification. Is it actually possible for a massive company to fully diversify into something quite different? Of course, that would be desirable from the perspective of the people who work there, who still need jobs. But, like, what what even is the kind of theory of change or the theory of transition for oil companies?
Krista:I don't think anyone has a really clear idea of this. And at the moment, it seems a little bit like the oil company's answer to just hope that it goes away. So So continue to do what they're doing and just hope that this all goes away, and they somehow find a way forward.
Markham:Yeah. It's it's fascinating how, you know, 20 years ago, BP, called itself Beyond Petroleum, and it was already grappling. But then it had the backtrack, and then it it it kind of had a transition strategy again. Shell had an energy transition strategy. They've all backtracked.
Markham:They've all gone back to their core business because shareholders don't wanna be funding, you know, risky experiments in renewables development or or EV charging infrastructure. They this idea that oil companies you know, Shell was, there was talk at one point of Shell becoming like an electrical utility in in Europe. You know, all that all of that has gone by the The only company I can think of that has successfully made that pivot is Equinor in Norway. You know, they
Krista:Even though I would say it's debatable, have they fully pivoted, but perhaps they've invested more than the others.
Markham:No. I wouldn't say fully pivoted, but the pivot's well underway. And then they're and they're committed to it, and they're committing capital to a wide variety of of, low carbon, business models. So I I think we'll say that that it's in process. We'll see how we'll see how the experiment turns out or how their business model turns out.
Markham:But they but the the others, including Suncor in Canada, was the only company that was trying a little bit of that, just a little taste of the Equinor approach. And just this it was either earlier this week or or late, last week, their CEO, Rich Krueger, came out and said, we're done with that. We've been too energy transition focused. We're going back to our our knitting, and we're just going to we're we're we're our first, second, and third priorities are making money and returning it to our shareholders. So they they're retrenching.
Markham:And I think based on what I know in Alberta and and of the industry, I think they're basically lying to themselves. I I think there's a there's a whole cottage industry, of analysts and economists and and trade associations and astroturf organizations that that supports this narrative that it's gonna be a, you know, it's gonna be a slow transition. And and I, you know, I follow analysts, oil and gas analysts. So their their stuff comes into my inbox on a weekly basis, And, boy, they just crow whenever there's a a perceived, either uptick for oil and demand, things get a little positive, or somebody said you know, some somebody somewhere says something negative about the energy transition. And they built this narrative, this bubble that the oil and gas CEO seemed to buy into where no.
Markham:No. No. It's okay. No. We're gonna have we're gonna have the demand growing out to 2040, 2050.
Markham:We're good. And and, and they ignore all the evidence that we're talking about here today. I I again, what's what's your take on that?
Krista:Yeah. I find that really interesting. I've I've found similar things. So throughout my PhD, even though I've very much been in the sustainability space, I've always tried to attend also some oil industry conferences and talks. And the the 2 artists completely worlds apart in every single way, and it's quite fascinating to see when I spend all my days talking about, okay, how can we decarbonize?
Krista:What's the future of renewable energies? And then going to, like, an oil industry talk, which is all about, like, oh, oil price is going to go like this. So we're gonna need to invest way more than we thought, and it's gonna be a great future, a great 10 years ahead. And again, I mean, there's a lot of aspects to this. So companies answer to shareholders.
Krista:Most shareholders are quite short termist in their view. Let's be honest. And in the short term, perhaps this strategy is fine. Just kind of wait and see, hope things stay as they are. Because as we say, we don't know when the peak is coming exactly.
Krista:But then on the other hand, if we assume that we at one way or another, we have to carry out some kind of an energy transition. So we simply have to reduce our reliance on fossil fuels for energy, And it is already happening. We have we are seeing the tide turning even though we don't know the speed. So it's just interesting to think like, what is the end game then for oil companies? And the only options I can see are well, firstly, be the last oil company somehow using supplying that remaining demand.
Krista:And again, that can't be everyone. Secondly, diversify, so become something else. Or thirdly, just stop being a company. So over time, just ramp down your operations, return capital to shareholders, which is quite untenable for any actual company to say that this is their strategy in the long term. So those are kind of the 3 high high level strategies that I can see in a world of declining oil demand.
Krista:And then there's a 4th strategy. Oh, it's not really a strategy, but it's what I've called unmanaged decline. So that's what happens if you're not preparing for a declining oil demand, and then it just comes anyway, and you're not you're not ready to do anything about it. And what happens then? That's pretty disastrous for any economy that's reliant on oil companies.
Krista:And then, again, when we look at what's actually happening, it seems that almost every company, oil company in the world is currently banking on being the last oil company, or then they simply don't believe in this transition at all. And then both of those in the long term are not going to work. They might work in the short term, but not in the long run.
Markham:Wood Mackenzie, the big international consultancy, put out a a a paper last year that I'm fond of referring to, and they basically said, look. It it it it was we we think that peak oil demand is gonna come in 2030, and then there'll be a a plateau, and then there'll be a decline somewhere. You know, it might be early 2030s, early 20 35, somewhere around there. They said oil companies have about a decade of where they can they can probably count on pretty good healthy profits because the industry has been underinvesting in, you know, capex is about 40% of what it was 10 years ago. Right?
Markham:So they haven't been investing in exploration and production, and so supply is going to be tight, and so prices are gonna be high. Profits will be high, and WoodMac advises its oil and gas clients, now is the time to, a, strengthen your balance sheet, and, b, begin investing in low carbon business models because you you know, oil companies are literally oil tankers. They're the they're so big, and they're so focused on extraction and transportation of of oil and gas that that, you know, moving them in into a a different path is going to be take a a long time. You know, the old metaphor, you you don't turn a an oil tanker on a dime. They are the personification of that.
Markham:And so if they wait and they run out the clock on this 10 years and suddenly they find themselves under pressure, their ability to pivot to to develop low carbon business models, alternatives to what they're doing now, I I just don't I don't see how they're gonna do it in a timely fashion. This is you know, they're almost they are blockbuster and and Eastman codec.
Krista:Yeah. Yeah. I I can see that. And I mean, even even what you were mentioning earlier about, like, oil producers trying to use carbon capture and storage to somehow stay relevant and all that. That kind of technology development will take a huge amount of time in any case for any company.
Krista:And then when you add on top of that the layer of these are huge companies where people have been working there for decades on the same thing, and they just potentially don't even know how to do anything else. Even that cultural transition would take potentially longer than 10 years. And if it's not started now, it's really hard to say how how it's gonna be pulled off. And that's why this unmanaged transition seems like a quite likely scenario for some companies. And it's quite scary because it's gonna have big economic implications, not just for the companies themselves and their shareholders, but everyone in the communities that rely on profits from oil companies and countries whose entire economies are built around oil.
Markham:There's, there's another dilemma called the, innovation dilemma. And so when your company and your business model is disrupted by new technologies and you have to you have to innovate, how do you innovate? Do you build a skunkworks, in internally in your company to to come up with new products and services, and then spread it out to the rest of the company? Do you invest in start ups who are developing new technology that you can then buy, make incorporate them into into your company? And how do you do that?
Markham:And the the oil and gas industry, as I'm fond of saying, innovates really well inside their box. You know, like, if you need an oil, an oil engineer to figure out a problem downhole, you know, with the pump or the tubing or the whatever, they'll do that. I mean, they're brilliant. No question. I've sat across from enough enough of them and had that conversation to know that.
Markham:But if you now ask an oil company with that kind of culture and that kind of history and say, okay. We need you to innovate outside the box. We need you to start thinking about other products, other energy related products, technologies, and so on that we can get into as we build this low carbon business model as Wood Mackenzie has advised us. They're at sea. They don't they don't know how to do it, and and I think that's part of the retrenchment that's going on is oil companies have looked around and and and they just don't know what to do.
Markham:And so their natural response is just try to do what they do better.
Krista:Yep. That makes sense. Yeah. That makes sense. I mean, that's psychologically, that's what any of us would do, right, if we're thrown into something completely unfamiliar.
Krista:And then we can see that, okay, our whole life is is there waiting for us, and we can still make our money, and we can still be good at what we do. Of course, you want to go back to the old ways. And then a high oil price environment now just facilitates that even further because now you can get the sense of security. Okay. We still know what we're doing.
Krista:We're still we're still gonna be fine. But, yeah, I I agree. Absolutely. Like, I'd it's I think it's very unlikely that an oil company is gonna become a huge solar panel producer or something like that. There might be areas there in the energy transition that are a better fit for oil companies skills.
Krista:So things like carbon capture and storage, perhaps something to do with hydrogen, that use some of those same methods and ways of thinking that oil and gas production does. But then with those technologies as well, they simply haven't really been moving anywhere, and a lot of that has to do with economics. Right? So the company representatives always say like, oh, we would do carbon capture, but it's too expensive. So we need the policy to help us.
Krista:Otherwise, there's no point. And in some way, I think they're kind of shooting themselves in the foot with that one. Because again, when we do get to that point of oil demand decline, if if all the companies are still in the same position they are today, they're basically gonna be left with almost nothing to to build on. And they're gonna start have to start scaling up the new businesses from from scratch, if that is in fact what they're gonna do in the future. So there are probably chances where they could, could start pivoting and using their skills and infrastructure for something new.
Krista:But I think at the moment, just simply because the current business is still so lucrative, And they did they're just not looking kind of far enough ahead to actually go for it, which is a little bit worrying, to put it mildly.
Markham:Yeah. I I think the, Suncor's hiring of of Rich Krueger, who was a a long term he'd actually retired from ExxonMobil. I think he was there for 36 years, and he brought that ExxonMobil culture with him. And, you know, they hired the board hired, hired him with a very specific objective, which was to increase shareholders' returns. And, you know, he's old school.
Markham:And and so he, you know, he's not fooling around. He's he's not gonna be dabbling in this, you know, new voodoo over here on the side. No. No. No.
Markham:He's he's gonna do the what the oil industry has always done to make money for shareholders, and and that's and so I guess where I'm going with this is when I look around the landscape, I see some oil companies you know, like the Saudis, for instance, are getting into hydrogen, and they've invested heavily in in solar, and they're not really a you know, I wouldn't say they're developing low carbon business models, but at least they're they're playing around in the sandbox. And and then you see nothing in the US. Like, I I I don't know. You know, ExxonMobil's got some things going, but they're, you know, really in the lab. They're not even out of the lab yet for the most part.
Markham:But it's just really hard to look around the landscape of global, oil and gas companies and see any aside from Equinor, you know, that have said, okay. You know, this is an existential threat to our business model, and we need to respond to it, and we need to come up with some other kind of a business model that will thrive in a low carbon post combustion kind of world, and they're all retrenching. And I and I'm gonna argue. In fact, I'm writing the column now. This is why I bring up these, you know, the incumbents dilemma and the and the disruption dilemma where I where I'm where I say, we cannot depend on the oil and gas companies to lead the energy transition.
Markham:They simply have not got the skills and the understanding of the other parts of the energy system to do this, and the only rational or or reasonable approach to this is for, basically, the state, the government, to lead that to lead that process and build the kinds of build new domestic markets for that oil and gas. So Alberta has a a fabulous advantage in that bitumen, is a wonderful feedstock for materials manufacturing, but you can't expect the oil companies to build the, you know, develop the the process for turning bitumen into into carbon fiber precursor or some other material. It's being done outside. It's being done funded by the government in their in their Alberta Innovates, the provincial government's, innovation agency. And it's gonna have to take place basically, the government and the business community and investors build this alternate domestic market alongside the existing fuels and refining market, and then the oil and gas industry just kind of pivots over and says, okay.
Markham:Well, as these markets decline, we now have these markets growing, and that's gonna be our future. We'll you know, we're gonna make we're gonna make stuff out of bitumen instead of shipping it off to the United States to be refined into diesel and gas and aviation fuel and so on. That's very unique. The the the that's a unique opportunity. There I can't think of many, if any, other company countries and oil companies that have that opportunity.
Markham:I don't know if there's a question buried in here for you, Krista, but maybe, you know, just to wrap up our interview, you could respond to that. What do you think?
Krista:Yeah. I haven't actually heard of that. As I said, I'm not really an expert on Alberta specifically, but I think that that sounds very interesting. Just to pick up on what you said about the government has to lead the way, because the oil companies are not capable of innovating in that way. I think they might be capable of innovating in that way, but just just very pure and simple economics and the short term is view of most businesses that work to return shareholder value or grow shareholder value quarter after quarter is that I don't think any company that's as profitable profitable as oil companies now are are going to want to or have incentives to to innovate their way out of this and innovate out of the market that right now seems like a very good market to be in.
Krista:So from that perspective, I really agree that policy has to take the lead and the kind of impetus for change has to come from somewhere else if we want to have like a managed transition away from oil and gas. I think if we just let things to roll as they are, sooner or later, we will be at the point that we've been discussing the kind of point of peak oil demand and plateau and eventual decline. And then if nothing has been built at that point for these companies to fall back on, then we're gonna have some some really big trouble in all the countries that are are reliant on these companies. So, yes, I think we do need some more kind of long term policy making, would be nice. I don't know how realistic that is, but it's good to hear that there's at least something going on in Canada.
Krista:There might also be potential for, like, shareholders, perhaps perhaps institutional shareholders to look more long term into what is the role of these companies in society and what is the what what does the future look like if we think about, for example, that we still need to, like pension funds still need to provide returns for decades to come? So there are some potential actors here who could take a more long term view. But the companies on their own, when the oil price is high, it's really hard to see why they would would want to change anything.
Markham:Yeah. That's a really good point. Pension funds and and, and the financial community, which are heavily involved, heavily invested in, oil and gas, do have a, an incentive to, you know, invest in or or force the companies to pivot into these low carbon business models. But shareholder activism is a very uncertain, approach to this or, you know, it it sometimes it works, sometimes it doesn't work, and the oil companies have certainly been resisting that in shareholder activism to do these kinds of just to get into even climate mitigation and and reduce their greenhouse gases, let alone build a whole new business model. So I I'm not I'm not optimistic that the the oil companies are are prepared, you know, to do this and or and investors could force them if if they aren't.
Markham:So but on that note, thank you. This has been a fascinating conversation. I really appreciate this. Thank you, Krista.
Krista:Thank you. It's been really interesting.